07ASTANA3318, CONOCOPHILIPS CEO SEES PROSPECTS FOR JOINT

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C O N F I D E N T I A L ASTANA 003318
SIPDIS
SIPDIS
E.O. 12958: DECL: 12/14/2017
TAGS: EINVENRGEPETPRELKZ
SUBJECT: CONOCOPHILIPS CEO SEES PROSPECTS FOR JOINT
OPERATORSHIP AT KASHAGAN
REF: (A) ASTANA 3281 (B) ASTANA 3226
Classified By: Ambassador John Ordway, Reasons 1.4 (b) and (d)
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Summary
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¶1. (C) ConocoPhillips CEO James Mulva told the Ambassador on
December 13 that he sees prospects for a deal under which Eni
will be replaced as Kashagan operator, with three of the
larger consortium members developing the field as joint
operators. All companies in the Kashagan consortium except
ExxonMobil have agreed to increase the stake of KazMunayGaz
(KMG) in the project. A negotiating group is working in
London to establish the compensation due Kazakhstan for
Kashagan delays and cost overruns. While in Kazakhstan,
Mulva will also discuss with the GOK the results of a
ConocoPhillips study of the country's gas transportation
options and make a renewed pitch for a ConocoPhillips role at
N-Block and the Northern Caspian Jurassic Block. End Summary.
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Kashagan
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¶2. (C) In a meeting with the Ambassador on December 13,
ConocoPhillips CEO James Mulva discussed two key outstanding
issues in the Kashagan dispute: operatorship and
compensation for Kazakhstan. Mulva told the Ambassador that
he sees the emergence of a deal under which three of the
larger companies in the Agip Kashagan Consortium (which
consists of Eni, Total, ExxonMobil, Shell, ConocoPhillips,
and KazMunayGaz) will develop the field under a joint
operator model, with perhaps one company taking the lead on
each of the three main aspects of the project: on-shore,
off-shore, and pipeline. A joint operatorship might require
the creation of a new entity, which could be lightly staffed
with just a dozen or so key people, he explained. According
to Mulva, Eni may remain responsible for developing
Kashagan's initial phase - and may even be left in place for
the longer run as the formal operator, in order for the
company to "save face." Full-field development, however, is
beyond Eni's capabilities and must be performed by larger
companies, contended Mulva. Since ConocoPhilips owns a
smaller share than the others, it has decided not to take a
leading role in the negotiations, and will accept what
ExxonMobil, Shell, and Total work out.
¶3. (C) Mulva explained that the Kazakhstanis continue to ask
for $7 billion dollars in compensation for the Kashagan
development delays. At a $55 per barrel price for oil, the
project is not even worth $7 billion dollars, he argued.
Thus, the consortium members have said no to this demand.
Mulva said that all the companies except ExxonMobil have
agreed to a dilution of their ownership share and thus an
increase in KMG's equity stake of 8.33 percent. The sides
are negotiating in London to establish the value of the
additional ownership stake. The companies expect that KMG
would pay something for the stake, and the difference between
the valuation of the stake and KMG's payment would be part of
Kazakhstan's compensation. Mulva reminded the Ambassador
that valuation is a very complicated process, requiring the
sides to agree on a number of factors, including future oil
prices and an appropriate discount rate.
¶4. (C) Mulva contended that the main issue for ExxonMobil is,
in fact, what the fair market price is for KMG's increased
share - hinting that in the end, ExxonMobil would agree to go
along with dilution once this is worked out. (Note: During
a December 3 meeting in Washington, ExxonMobil International
Governmental Affairs Manager David Bailey told the Ambassador
that ExxonMobil is prepared to agree to dilution if
compensated. End Note.) Mulva explained that if ExxonMobil
is offered a piece of the operatorship and the valuation
issue is resolved, then the other companies will have more
leverage to pressure ExxonMobil to finalize a deal. Mulva
argued that all of the consortium members agree that "we need
to get this done," particularly because further delays may
force the consortium to shut down portions of the project.
Even brief delays now may delay the project by several years,
as equipment, supplies, and personnel are reallocated to
other projects around the world.
--------------------------------------------- -------------
ConocoPhilips Pushes for Additional Projects in Kazakhstan
--------------------------------------------- -------------
¶5. (C) Mulva told the Ambassador that the main reason for his
trip to Kazakhstan is, in fact, to lobby for a role for
ConocoPhillips in two major off-shore projects and to discuss
the results of a ConocoPhillips study on gas. ConocoPhillips
remains very interested in developing N-Block, said Mulva.
Nevertheless, Kazakhstan still insists that it will undertake
at least the initial project development on its own.
ConocoPhillips has also conveyed its interest on the Northern
Caspian Jurassic field and will continue to push for
involvement, although Kazakhstan has received 15-20 other
proposals, according to Mulva. In general, he said,
Kazakhstan is delivering the message that it wants to solve
Kashagan before discussing new projects.
¶6. (C) Mulva will also discuss with the Kazakhstanis the
results of a study on Kazakhstan's gas performed by
ConocoPhillips upon the suggestion of Prime Minister Masimov
in June. Masimov expressed Kazakhstan's interest for further
information on options beyond traditional exploration and
development projects, including LNG, CNG, and pipelines.
Nick Olds, Conoco Phillips Country Manager for Kazakhstan,
reported that the study revealed that Kazakhstan's three best
gas options are continued northern transport through Russia,
a trans-Caspian option, and a pipeline to China. All other
options, including LNG and CNG, make little economic sense.
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Comment
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¶7. (C) Mulva's comments, and President Nazarbayev's recent
assurances to the Ambassador that Kazakhstan will not
invoke its sub-soil law, strengthen our belief that the
Kashagan dispute will be resolved through negotiations,
although not likely before the latest December 20 deadline.
Thus far, Kazakhstan has handled the negotiations skillfully,
driving a hard bargain without scaring off investors, as
witnessed by Mulva's visit to push for further investment in
the country.
ORDWAY

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